Hamish McRae: Old King Coal is a merry old soul... but will the future of fossil fuels be so happy?

Stuck above $60 a barrel, liable to surge to $100, or about to fall back to $25?

The professionals have rarely disagreed more about the medium-term outlook for the oil price, but there is little disagreement that higher energy costs are beginning to feed through into higher inflation more generally. People are now talking about US interest rates going to 6 per cent to curb inflation, while the majority view here seems to be that the next move in rates,when it comes, will be up rather than down. So the direction of energy prices matters enormously - and not just at the petrol pumps.

When experts disagree, the thing to do is go to basic facts. The latest edition of BP's admirable annual Statistical Review of World Energy is just out and some of the data in it deserves a wider audience. For me, the clearest message is that oil supplies will remain under great pressure and the burden of keeping the world economy supplied with energy will fall increasingly on King Coal.

The figures run up to the end of last year, so this is a snapshot that is already out of date. Nevertheless, it demonstrates just how tight the world's oil supplies have become. The global economy grew by around 5 per cent last year but oil production rose by just 1 per cent, with all the increase coming from Opec members.

In the non-Opec world, US domestic production was down over 5 per cent on 2004, and Canada and Mexico both fell by 1 to 2 per cent. The North Sea is in rapid decline, with Norway's output down 7.5 per cent and the UK's 11 per cent. We were still net exporters of oil but only just: production was little more than two-thirds the level of the 1999 peak.

Elsewhere, the pattern was uneven. In the Middle East, both Saudi Arabia and Kuwait were up a bit, but Iran and (unsurprisingly) Iraq were down. Africa and Russia were on the rise, as was the former Soviet Union as a whole. Indeed, were the Soviet Union still a single country, it would be the world's largest producer - larger than Saudi Arabia. The overall picture, though, is of tight supplies.

If you look at natural gas, however, the picture is a little easier. Production was up by 2.5 per cent, despite declines in output in the US and EU. The former Soviet Union, Latin America and Africa all increased their output. There were also some quite startling increases - in Libya by 80 per cent, albeit from quite a low base. You can see why this country is Britain and America's new best friend.

But when you look at coal, the picture becomes easier still - or more alarming if you think about the environmental implications. World coal output was up over 5 per cent, with China on the rise by more than 10 per cent. The country mines 38.4 per cent of the world's coal and, if things go on like this for much longer, we will find it producing more than 40 per cent. At the moment, three countries in the Asia Pacific region - China, India and Australia - mine over half the world's coal, while the US digs up another 20 per cent of the stuff.

Now look where the reserves are located. Oil is overwhelmingly in the Middle East (see the left-hand graph above). A fierce debate rages over whether Saudi Arabia really has as much oil as it claims, and Kuwait has had problems with one of its largest fields, where output has collapsed. But it is beyond dispute that most of the reserves are in the Middle East and that the region will use little of them. It is also beyond dispute that Asia has little oil and this is, of course, the fastest-growing region in the world.

With gas, the picture is more balanced in the sense that the supply is closer to the demand. Europe - and for the purposes of this classification, the former Soviet Union counts as Europe - has a lot of gas. Russia is the Saudi Arabia of gas.

In the case of coal, supply is sill more closely balanced with demand. Asia has the largest reserves. Europe (including Russia) has huge reserves. And North America has almost as much too. The Middle East, on the other hand, has little.

Now think of this in geopolitical terms. With oil, the region that needs it least (in the sense that the economies and populations are quite small) has the most of it; and the place that needs it most has the least of it. So China is scouring the world to secure its supplies.

In the case of natural gas, the Middle East has a vast surplus but so too does Russia. So reserve-poor Western Europe has to learn to deal with Russia.

But far fewer potential political tensions surround coal. From a geo-political perspective, it is a far more secure source of energy. China needs it, but has got it. The US needs it, but has got it. Europe needs it too, but has also got it.

Then add in the calculation that, at present rates of consumption, the world has about 40 years' supply of oil left, some 65 years of gas but more than 150 years of coal. The overriding conclusion is that if the world remains a fossil-fuel economy, it will increasingly turn to coal. At the moment, at least, and particularly given what is happening in China, it seems that it will remain a fossil-fuel economy for at least another generation - probably longer.

If this is right then the debate shifts to two other areas. One is which fossil-fuel technologies are going to be the winners in the next generation. The other is how we will cope with the environmental consequences of remaining a fossil fuel economy. I shall try to return to both these in the coming months but a couple of pointers are worth noting here.

On the first, the key issue will be cost. Oil remains the most convenient of fuels, there is a massive installed base of technology that uses it and there are some applications, such as aircraft, for which there is no substitute. So the question is what will be the cheapest (allowing for environmental considerations) way of increasing oil supplies? What balance will it be between shale oil on the one hand, and maybe growing dedicated oil crops on the other? Or will the technologies that turn coal into oil win in the end?

On the second, the hot issue will surely be carbon sequestration: finding ways of offsetting the additional carbon dioxide that will pass into the atmosphere or somehow sinking the carbon back into the ground.

One function of the oil price rises has been to give a huge push to the oil majors. They have to figure out how to find more supplies, how to develop alternative sources of energy, and how to manage the environmental consequences of their activities. Meanwhile, China will carry on mining more coal.

Dear Mr Kidman, keep the day job...

I suppose the economic incentive of the week is the reported pre-nuptial agreement between Nicole Kidman, the actress, and Keith Urban, the country singer. They are at present engaged and, according to the rumours, on their marriage he will get $600,000 (£330,000) a year; however, if he goes on the booze or the drugs he will get nothing.

The new fashion in the economic profession is to try to apply the subject's disciplines to the real world, and in particular to issues such as the response by people to economic incentives. So interest has surged in the study of such practical issues as how you make families or companies behave better or how you make people save more for their pensions.

The latest clutch of research, published this weekend in The Economic Journal, includes several such studies. One is about the extent to which people will save more for their pensions if they expect the state pension to be low. That might seem obvious, but a country's economy will do better if it saves more now and relies less on taxing the next generation of workers.

Another study looks at how consumer boycotts push large, powerful companies to "go green". Another argues that massive inward migration will be needed if the present state pensions are to be funded.

But the one I like most is a study by Professor Kaushik Basu of Cornell University on power balances in marriage. He is more concerned about children in poor families who are put out to work than about actresses worth some $150m. Still, some of the conclusions might be relevant to the Kidman/Urban union.

One finding is that marriages work best from the point of view of the children when power is evenly balanced between the man and the woman. Husband-dominated families in poor societies tend to send the children out to work, but as the woman's power increases, child-labour declines. If, however, women become much more powerful than the men, then the incidence of child labour rises again. So a household where the husband and wife are equal partners is the one least likely to send its children to work.

And there is more to Professor Basu's research. It seems that when a husband-dominated household sends the wife to work, that in itself can end the husband domination. Memo to Mr Urban: take the cheque, by all means - but keep singing.